It’s been a bumpy few years for business supply retailer Office Depot Inc. (NASDAQ:ODP). Like the rest of its retail peers, ODP stock has been struggling against advances in technology and as a result it has fallen considerably from highs above $40 per share to the $3.36 per share we see today. That marked decline has brought contrarians out of the woodwork, but it may not be time to bet on the firm’s turnaround just yet.
Fighting a Multi-Fronted Battle
ODP stock has sunken further and further as the company continues to report top and bottom line figures that suggest the business is deteriorating. A big part of the reason for Office Depot’s lackluster performance is the fact that the company is fighting against technology in more than one respect.
Like the rest of the brick-and-mortar retailers out there, ODP has to contend with the likes of Amazon.com Inc. (NASDAQ:AMZN) in order to generate sales.
However unlike, for example, a clothing retailer, Office Depot specialized in products that are becoming obsolete as new technology emerges. iPads, email and smartphones have made buying things like paper, printers and even pencils less necessary for businesses and individuals. That shift is causing Office Depot to completely reinvent its business.
That’s not to say that ODP is just rolling over and dying. The company has been working to create new opportunities through strategic acquisitions that it hopes will drive customer traffic, revive its sales and create new revenue streams.
In October last year the firm announced that it was buying CompuCom Systems in a $1 billion deal. ODP management said that CompuCom’s expertise in IT services will be a valuable asset as they work to pivot the company from “a traditional office products retailer to a broader business services and technology products platform.”
CompuCom provides Tech-Zone, a service business that small and medium sized businesses can access. Now that CompuCom is a part of the ODP umbrella, Tech-Zone will be rolled out in each of the company’s retail locations- a move that management hopes will increase Tech-Zone’s reach while simultaneously bringing traffic into stores and encouraging more purchases.
Shortly after the CompuCom acquisition, Office Depot announced that it was launching BizBox, a service platform that helps small and medium sized businesses with things like email marketing, CRM and website creation and management.
Will It Help OPS Stock?
There’s a lot to be said for ODP’s initiatives. The firm is aiming to become a one-stop-shop for small businesses by offering its customers everything from office equipment to help with their online presence. If it’s successful, it will create a powerful business with an impressive moat. Companies that decide to use Office Depot for all of their supplies, IT support and operational needs.
However, there’s a downside too. It sounds like a great idea, but Office Depot has plenty of hurdles to clear before it becomes a reality. For one, the CompuCom purchase wasn’t cheap. In fact, ODP stock actually declined on the news of the purchase because investors were unsure of whether or not the acquisition was worth its $1 billion price tag.
Not only that, but ODP will take on a great deal of debt when CompuCom joins the roster. Office Depot is expecting to refinance the firm’s debt and take on a new loan of about $750 million to cover it.
Additionally, IT services for small businesses is a field with quite a few competitors. Office Depot will have to compete with companies like Best Buy Co Inc. (NYSE:BBY), whose Geek Squad have been around much longer and now offer options for small business owners.
The Bottom Line on ODP Stock
It’s too soon to tell if ODP stock can make a turnaround happen. On one hand the company is certainly fighting to stay alive in a treacherous space, but on the other there’s a lot of risk that it simply won’t work out. The fact remains that ODP’s retail business is failing and without a boost from CompuCom and BizBox, the firm will slide into the retail graveyard.
The rest of 2018 should be telling for ODP stock because it will give the company a chance to follow through on its strategic initiatives and prove to shareholders that it can return to growth. However, for now, I’d wait on the sidelines.
As of this writing Laura Hoy was long AMZN.